Creating value

Determining the correct customs value for imported products is one of the most technically challenging aspects of managing customs compliance. However, as it often directly impacts revenue collection for the authorities, it is very important to get it right, and to be able to support any customs value declared. Incorrect or unsupportable customs values can lead to overpayment of import taxes that cannot be claimed back. Underpayment of import taxes that are assessed retrospectively trigger, potentially significant, penalties and waste management time dealing with queries and challenges.
 

Conversely, correct and supportable custom value declarations will have a positive impact on business, reducing costs and increasing efficiencies.
 

The 1994 GATT agreement on valuation for customs purposes sets out many core principles on ways to determine the appropriate customs value for imported products, based on arm’s length pricing and the concept of the “price paid or payable” for imported goods. Most countries have officially implemented a national version of this agreement or abide by its principles. Although the intentions and ambitions of the agreement were clear, in practice many details are not or only vaguely addressed. This has resulted in widely varying interpretations and implementation in different countries, particularly in relation to customs valuation if the seller and buyer of a product are related companies.
 

In addition, although the concept of arm’s length pricing may be the same, the application of it for customs valuation purposes is significantly different to that for transfer pricing purposes. However, the latter is both better understood and takes priority within many multinational companies.
 

All of the above leads to the following typical challenges when managing customs valuation

• managing price changes, especially if they are reductions, sudden, and/or significant;
• dealing with retrospective transfer pricing adjustments;
• determining how to treat payments such as royalties, license fees, management fees etc. for customs valuation purposes;
• customs valuation treatment of incidental importations (e.g. software, hand carried products).

Customs around the region have become both better trained and more aggressive in challenging declared customs values, particularly for related party trade. They are aware that in many cases companies may have no substantial support for customs value declarations other than transfer pricing support, which is often inadequate for this purpose. Therefore, proactive and specific management and support of customs values is a must for any importer to safeguard against non-compliance and liabilities.
 

More positively, such a proactive approach to customs valuation may result in duty savings through opportunities to unbundle non-dutiable elements from an import price. In addition, many authorities offer the option to obtain customs valuation rulings, which can provide more certainty of compliance as well as savings.
 

How can WMS help?

WMS has both a broad and deep understanding of customs value laws and its interpretations. Last calendar year alone, our team was involved in over 200 customs valuation disputes. Many of our staff are ex-officials that provide additional insight into the authorities’ views and concerns relating to customs valuation. Our typical work covers the following:

• Critical assessment of the accuracy and supportability of declared customs values; this includes both the arm’s length nature of related party pricing and any separate payments made by the importer.
• Reducing duty costs through unbundling non-dutiable components from import prices;
• Assistance in managing customs valuation challenges and audits;
• Voluntary disclosure of customs valuation non-compliance, such as accidentally erroneous declarations, non-inclusion of assists, transfer pricing adjustments, etc;
• Provide training to staff on customs valuation issues and risks to create awareness to limit the opportunity for non-compliance.

Case studies

Reducing an assessment of back-duties and penalties on royalties

A manufacturer of automotive parts was audited by the Post-Clearance Audit Bureau (PCAB) of Customs and was challenged on the dutiability of the royalty fees paid under a License and Technical Assistance Agreement.
 

How we helped

WMS conducted an analysis of the License and Technical Assistance Agreement to assess the dutiability of the royalty fees from a customs valuation perspective and provided strategies to mitigate risks resulting from historic as well as future shipments.

• A technical assessment on the dutiability of the royalty fees;
• Addressing the transactions of the concerned imported goods as well as strategies for future shipments; and
• Provision of strategies and technical information and regulations to support the negotiation process with PCAB to reduce the duty and tax exposure.

Benefit for the client

Significant reduction of the duty and tax exposure from approximately US$ 2.7M to US$ 467,000.
 

Assistance on a voluntarily disclosure of non-compliance issues to Thai Customs for a leading trading company in Thailand

A company approached us as it was concerned about possible non-compliance with various customs laws and regulations, and the potential for back-duties, penalties and supply chain disruptions.
 

How we helped

WMS provided support to minimise the duty and tax exposure as a result of non-compliance issues related to the use of duty privileges for imported automotive parts. Our work included:

• Analysis on the potential risks and exposures for historic and future ongoing shipments;
• Provision of technical information and precedent rulings to support the company’s position;
• Provision of a report on available self-disclosure possibilities, including pros and cons and potential penalties under each scenario, and recommendations on strategies and steps to mitigate the customs risks and exposures; and
• Preparing the company for the voluntary disclosure and provision of ongoing assistance throughout the voluntary disclosure process.

Benefit for the client

• Significant mitigation of duty and tax exposure for approximately 550 million THB (18.3 million USD).
• Improved compliance level for the company in relation to using duty privileges for future shipments.

There are many factors that are relevant when a company considers selling their products into a new market. These include legal and regulatory requirements, economic opportunity, operational considerations and many more. What is easily overlooked or underestimated is one of the first challenges impacting the entry into a new market: clearing customs.
 

Being prepared for such challenges, and being aware of the facilities that exist to make the physical market entry process efficient and effective, are important first steps to create a sustainable new business. Can you operate as importer? What registrations are needed, and how long does it take to get them? Do you need an import license? What import taxes apply, and are they recoverable? Can you defer or exempt payment of these taxes? Can you use bonded facilities? If so, what are the bond requirements? How do the customs authorities operate, and what do they expect of you? Are there other regulatory requirements that are policed by Customs? What happens if something goes wrong? Who would be liable? Are your goods - or worse, employees - at risk of detention? The list of questions goes on.
 

In order to enter a new market successfully, companies need to obtain a good understanding of the customs environment in that market, both in theory and in practice. This allows an informed decision to be made and risks to be understood and mitigated.
 

Having said that, in the least developed markets, the availability or reliability of relevant information is often limited, and laws and regulations may not be published or clearly applied. Obtaining the best possible practical knowledge will, in such cases, often still result in a competitive advantage being created.
 

How can WMS help?

In most territories we have local staff in-country that can help identify and analyse the impact of relevant regulations and its practical implementation. Usually our teams include ex-officials that will be able to overlay the regulatory analysis with knowledge of the likely approach by the authorities at or after the border.
 

Our services include:

• Provision of tailored “Customs Knowledge Templates”;
• Discussions (named or on a no-names basis) with the authorities to gather more insight into what can be expected when the supply chain starts moving;
• Opportunity assessment of trade facilitation or duty reduction options, such as Free Trade Zone opportunities or current and future FTA feasibility analysis;
• Assistance in registration and licensing;
• Application for advance rulings, where available.

Many governments encourage “import for export” activities, which create employment and economic activity without opening a domestic market for international competition.
 

To facilitate such activities, a variety of bonded facilities may be offered. The most common ones are:
 

Free Trade Zones (under a variety of names) – fixed areas, usually outside the customs territory of a country but within its geographic borders. Goods entering such zones are not considered imported, and when they leave they are not deemed to have ever entered the country. Hence no import taxes or licenses are usually due. Activities inside such zones tend not to be closely monitored, although inventory controls may be required to prevent accidental or deliberate diversion to the domestic market. Imports from Free Trade Zones are not encouraged and may not be allowed.
 

Bonded manufacturing - physical locations where manufacturing is allowed to take place without the need for payment of customs duties or other import taxes on imported materials. Import duties are payable on imported finished products as per normal customs clearance. A bond or guarantee will be required to cover a certain level of customs revenue, and may be reduced if compliance levels are good. The type of operations that may be carried out, as well as the type of materials that may be imported under bond, are usually specified. Strict inventory control requirements exist. A minimum level of export of finished product is often stipulated.
 

Bonded storage – a physical or virtual location allowing the storage of products without payment of customs duties or other import taxes, until the goods are re-exported or released on the domestic market.  The requirements and restrictions are similar to those for bonded manufacturing, but no processing other than minor processing to keep products in good condition will be allowed.
 

Clearly, the benefits of such facilities in terms of duty deferment or suspension, as well as supply chain management efficiency, are substantial. However, the practical implementation of them can be complex in terms of application criteria, approval process, supervision, etc. If any compliance lapse is identified by Customs, a company may lose its authorisation to use the facility and be subject to penalties for the breach of regulations.
 

How can WMS help?

With our deep knowledge and hands-on experience in bonded facility availability and requirements, WMS is able to provide solutions to help companies achieve optimal benefits from such facilities, through:

1. Qualification Assessment – carry out a feasibility study to identify the key criteria and help the applicant get a clear picture of the available options and their requirements;
2. Application Support – facilitate the application process with government authorities and assist in the development of positive arguments/ supporting documentation for eligibility;
3. Compliance Reviews – monitor the use of bonded facilities and review compliance to avoid potential customs challenges or disputes.

Case Study

WMS was asked to conduct a trade compliance audit for an US-based OEM company which manufactured electronics parts in Penang, Malaysia. The trade compliance audit focused on compliance with Malaysian Customs requirements of running a Licensed Manufacturing Warehouse (LMW).
 

How WMS helped

We carried out a three day review of documentation and interviews with key personnel to assess awareness, knowledge and compliance. We identified a number of control weaknesses and authorisations that had not been renewed in a timely manner. We helped design and implement procedures to increase compliance control. We revisited the same site a year later to reassess the status of operations from a trade compliance perspective.
 

The assessment was based on the previous recommendations and comments in our initial deliverable.
 

Benefit to the client

• Comfort that appropriate control processed and procedures were in place to manage the compliance requirements for an LMW;
• Passing of regular customs audits without any assessment or identified areas for improvement.

Together with customs classification and customs valuation, determination of “origin” for international trade purposes forms the core triangle of technical customs deliberations.
 

“Origin”, in this respect, is an indication of the country in which an internationally traded product is deemed to be originating, and generally comes in two forms.
 

Non-preferential origin

This usually determines the applicability of non-tariff measures such as quota’s, licensing, anti-dumping, embargoes, etc. The World Trade Organization (WTO) and World Customs Organization have been working on harmonising such rules for all WTO members since 1995, but progress has been slow, particularly for the more contentious categories of manufactured products. Consequently, although the principles underlying such rules (usually based on a change in tariff classification) are consistent, the precise implementation is not. Hence a product processed in two separate stages in, say, Brazil and Hungary, could be deemed to be of Brazilian origin when imported into, say, India; of Hungarian origin when imported into, say, the Ukraine; and of undetermined origin when imported into, say, Oman.
 

Awareness of relevant non-preferential origin rules is important to be able to predict and manage the specific compliance requirements that may apply upon importation into any given territory.
 

Preferential origin

This refers to the applicability of preferential treatment for imported products under specific Free Trade Agreements (FTAs). Usually such preferential treatment manifests itself in lower or zero rates of customs duty, but other preferences, such as removal of quota limitations, may also apply. Every FTA will specify detailed rules, usually based on the tariff classification of imported products, which determine when a product can be deemed to be originating for preference purposes, or in other words: what level of processing is necessary to ‘confer origin’. In addition, the FTAs will have compliance rules specifying operational requirements that have to be met, such as direct shipment or the need to submit a Certificate of Origin.
 

As the authorities are granting tax concessions that impact their revenues, the process of claiming and substantiating preferential origin is subject to much and increasing scrutiny. Operationally, it requires input from both the importing and exporting entities, which may be hard to coordinate.  As such, it is crucial that adequate communication procedures be established and activities allocated to ensure each party understands its role and responsibilities in this process.
 

Key questions that need to be answered are:

• Is a product covered by the FTA?
• Does the product satisfy the rules of origin?
• What is the amount of duty savings that can be achieved? (now versus in future)
• Does a trade flow fulfil all the compliance requirements?

Claiming preferential treatment may look easy on paper, but can run into many roadblocks. The most common ones we observe are:

• Information gathering – What applicable FTAs are in place?
• Where do you start? – Looking at the FTA legal text
• Cost-benefit analysis – Is it worthwhile to utilise the FTA?
• Understanding Rules of Origin
• Application of Rules of Origin – Do you qualify for FTA?
• Getting documentation in place
• Approval from government authorities
• Supply chains too complex
• Defence against post-verification checks
• Keeping up-to-date with future opportunities

How can WMS help?

We have worked with many clients in relation preferential and non-preferential origin issues. The type and extent of our involvement depends on the precise needs of a particular client, as well as the knowledge and resources available inside the client’s organisation. Below, we list some types of our possible involvement, followed by a more detailed description:

• Type A – FTA Updates and Alerts
• Type B – Feasibility study
• Type C – Operational Support
• Type D – Training
• Type E – Strategy advice

Type A – FTA Updates and Alerts

FTA news pops up virtually every week. We can provide regular updates and alerts to you on:

1. Developments on FTA changes or introductions relevant to you;
2. Analysis of product coverage, rules of origin and compliance requirements relevant to your supply chains;
3. Updates on preferential duty rates for products of interest;
4. Updates based on our practical experiences of FA implementation in various territories;
5. New customs classification rulings that impact FTA usage.

Updates can be provided at a frequency (e.g. monthly, quarterly) and level of detail (general FTA rules, specific considerations for your products) to be agreed with you.
 

Type B – Feasibility study

Type A services focus on keeping your knowledge of FTAs up to date. We also help our clients to determine in detail the potential of various FTAs for their business. For this, we work with you to develop a knowledge pack which covers:

1. Verification of product classification to the extent required;
2. Identification of the applicable FTAs to your supply chains;
3. Calculating possible benefits (current and future) on a product-specific basis; the future calculation will be based on your marketing forecast data;
4. Analysis of your processing operations to determine whether your products meet the qualifying criteria of relevant FTAs;
5. Analysis of your processes and procedures to determine whether your products meet the compliance criteria (e.g. direct shipment, invoicing flows, documentation).

Our experience is that the most beneficial approach to the above type of services is for us to work with you “on-site”, to facilitate iterative information gathering and sharing as well as knowledge transfer to your nominated employees. However, we can also work off-site over a longer elapsed period should that be you preference.
 

Type C – Operational Support

Whereas Type A and Type B are preparatory type service, with operational support we get down to the nitty-gritty detail of utilising FTAs with you. This could include any or all of the following:

1. Assist with the application for factory registration and relevant certificates of origin;
2. Assist with creating a submission pack (e.g. cost statement and supporting documents);
3. Review submission packs prepared by you;
4. Present the submission pack to the customs authorities;
5. Assist in dealing with queries and challenges from Customs.

The extent of our involvement will depend largely on the knowledge and resources you have available in-house.
 

Type D – Training

We run many different training sessions or workshops with our clients. These can last from a few hours to a few days, and be targeted at a few individuals or a wide team of your employees around the region with FTA related responsibilities.
 

Type E – Strategy advice

To make the most of existing and future FTAs, a range of strategic issue needs to be taken into consideration. We offer our assistance in relation to, for example:

1. Lobbying with authorities for inclusion of specific products and trade flows in a new agreement or an agreement under review;
2. Lobbying with authorities for amendments to the interpretation or implementation of qualifying or compliance criteria to better reflect your commercial reality (e.g. to take account of triangular invoicing;
3. Advice on changes to processing operations, in terms of the type and location of such operations, in order to better benefit from FTAs.
4. Location feasibility studies - determination of optimal location for manufacturing, shift of supply chain, invoicing and / or regional distribution centers, to better utilise FTA opportunities within your operational business requirements.

Case studies

Verification assistance

Our client in Singapore was contacted by Customs, who in turn had been asked by Korean Customs for a detailed retrospective verification of a preferential origin claim under the ASEAN-Korea Free Trade Agreement.
 

How we helped

We reviewed the original application documents underlying the request for preferential certificates of origin (From AK) and its supporting documentation. We uncovered that this information had not been kept up to date, and costing information had been applied on an “average” rather than a specific basis. Consequently, not all shipments that were shipped and had enjoyed preferential access into Korea qualified for such access. Specifically, we:

• Compiled and disclosed this information to Singapore Customs.
• Offered strategic assistance on how the client could manage the difficult position they had put Singapore Customs in vis-à-vis their Korean counterparts.
• Put in place procedures that would assess origin qualification on a shipment-by shipment basis and stop applications for certificates of origin for shipments that did not qualify.
• Identified ways in which more shipments could qualify and enjoy duty privileges in both Korea and Japan.

Benefit for the client

• Although back-duties were payable, the explanations and process improvements resulted in no penalties being imposed.
• Additional opportunities for FTA use were identified leading to approximately US$1.2 million in further annual duty savings.
• Trust and understanding between Customs and our client were restored and improved, leading to a successful application for a higher TradeFirst banding.

Opportunity assessment

We were asked by a client to review their potential for us of FTAs at a high level for all their global trade flows.
 

How we helped

We mapped all current and potential future sourcing of materials, destination of finished products and possible location of distribution hubs. We then analysed in detail the top 20% in value of finished goods product flows, by tariff code. We considered production processes and variable sourcing of materials under multiple what-if scenarios.
 

Benefit for the client

• We identified possible annual duty savings of just over US$10 million.
• We helped the client manage the supply chain change process required to achieve these savings.
• We provided templates for procedures and key documentation to efficiently manage the application and implementation process.

Now, more than ever before, companies operating in Asia can proactively take steps to reduce customs duty and related supply chain costs and improve operating performance. Numerous customs duty exemption schemes are available which typically, for many territories, include:

• Inward processing relief
• Outward processing relief
• Temporary import of capital equipment or goods for testing, for example
• Government granted merit-based duty exemptions for selected industries

However, many companies operating in multiple locations have insufficient experience or resources to fully understand the availability of and take advantage of the benefits offered by duty exemption schemes. Since customs duty is a bottom line cost affecting profitability, failure to maximise the opportunities afforded by the exemption schemes can lead to a reduction in a company’s competitive position, particularly in developing markets.
 

Goods imported free of customs duties under exemption schemes are typically closely supervised by the customs authorities. Therefore it is important that a company taking advantage of duty exemption schemes continuously monitors compliance with the scheme to avoid the customs authorities imposing potential significant penalties and/ or compulsory withdrawal.
 

How we can help

WMS has extensive experience in assisting companies in achieving the full potential offered by the various duty exemption schemes available in Asia, including identifying relevant duty exemption schemes suitable for the company’s goals and needs, analysing potential costs and benefits from participation and implementation of the compliance processes to apply for such schemes. We additionally help our clients with a continuous review of compliance with the various requirements, providing businesses an edge and a sustainable duty efficient model in today’s highly competitive business environment.

Case studies

Duty exemption for drilling equipment in multiple territories

Our client, an oil and gas drilling contractor, bid and won a large oil drilling contract which required them to move around capital equipment for the drilling project between several territories.
 

WMS advised on the import formalities and the potential customs duty implications and explored the applicability of potential duty exemption schemes and assisted in the application for such import tax exemption schemes.
 

How we helped

• Advised on the potential import taxes applicable and exemption available, and what terms should be included in the contract during the bidding process
• Advised on the import formalities required including registrations, licenses, permits, inspections and documentation required
• Assisted in applying for import tax exemptions in several locations
• Assisted in completing the import formalities for importing the equipment

Benefit for the client

Successful application of import tax exemption scheme in several territories in Asia and successfully completed all registrations, licensing applications and import formalities to allow the equipment to be in place in time for commencement of the contract period.

For many multi-national companies engaging in the international trade of goods, ensuring a smooth and efficient supply chain is generally one of the most important critical success factors and a smooth customs clearance process is commonly identified as a key element.
 

Trade facilitation programmes

Although customs authorities are tightening their supervision over the cross-border movement of goods, achieving predictable and smooth customs clearance is not by any means outside the control of a company.  Customs authorities have been working together under the World Customs Organization (WCO) SAFE Framework of Standards to Secure and Facilitate Global Trade to develop trade facilitation programmes that aims to provide preferential trade treatment to accredited importers, exporters and their agents.  These trade facilitation programmes vary by name across different territories (for example AA enterprise classification in China, Trade First in Singapore) but most commonly are known as Authorised Economic Operator (AEO) certifications.
 

Potential benefits

The potential benefits from participating in an AEO (or equivalent) programme under the WCO SAFE Framework generally includes:

• Expedited customs clearance
• Reduced physical inspections and verifications
• Priority to participate in new trade facilitation initiatives
• Reduced probability of a customs audit/investigation
• Open communication channel with Customs to discuss and resolve operational issues in a timely manner
• Improved supply chain visibility via access to valuable trade information

Governments around the world are also working extensively on mutual recognition of trade facilitation programmes across locations.  With continuous expansion of cross-border recognition of such programmes, especially in the Asia Pacific region, benefits from participation of such programmes would only increase over time as accredited companies benefit in multiple locations.
 

A fundamental business model for the future

Companies relying on a smooth and efficient supply chain should proactively seek to participate in trade facilitation programmes to improve the predictability and efficiency of the customs clearance process. The opportunity cost and the potential loss in competitiveness of non-participation could be very significant, especially when the benefits derived from such programmes continue to increase over time leading to an ever increasing gap in supply chain efficiency between accredited and non-accredited companies.
 

How can WMS help?

WMS has developed a systematic approach to assist companies in participating in trade facilitation programmes.  This includes

• Identification of relevant programmes suitable for the company’s requirements
• Analysis of potential costs and benefits from participation
• Gap analysis and readiness tests
• Implementation of necessary process improvement measures to achieve accreditation
• Assistance with application process including customs authorities’ verification audits

Case studies

Improving customs clearance lead times

A company, operating in an environment where quick delivery to customers was a key competitive advantage, asked WMS to help explore ways to significantly improve its customs clearance lead time. WMS worked with the company to identify and apply for trade facilitation programmes offered by the customs authorities in a number of territories.
 

How we helped

• We identified the trade facilitation programmes that matched the geographic footprint of the supply chain and would offer tangible benefits
• We reviewed the company’s operations to assess whether it satisfied the trade programmes’ criteria and identified  process improvement measures required prior to submission of an application
• We assisted in implementing various process improvement measures to prepare the company for the application and the onsite review/verification by the customs authorities, including
  • provision of training to staff
  • preparation of operation manuals
  • implementation of various internal control measures
  • assistance in upgrading the company’s accounting and IT systems to allow recording of important customs data as well as to permit electronic declaration
• We assisted in the application process as well as the onsite review/verification process conducted by the customs authorities
• We helped prepare responses to questions from the customs authorities

Benefit for the client

The company successfully participated in trade facilitation programmes in a number of countries, including achieving AA enterprise customs classification in China and AEO status in the EU and other locations. As a result the company was able to achieve 0% inspection rate for its importations thus significantly improving its supply chain efficiency.